UNPAID INTERSHIPS ARE GREAT! OR ARE THEY?

Not every appeal stems from a trial.  Nor is every appeal filed with the Court of Appeals.  Think of cases where you disagree with a decision from the IRS, for example.  Proceedings in tax courts, though not always called that, are in the nature of an appeal.

In these difficult economic times, a species of tax appeals that is becoming more frequent concern unpaid internships.  Articles pop up in the mainstream press with some regularity about the virtues of unpaid internships.  Students receive practical experience and the chance to prove themselves, perhaps earning a paying job in the process.  Employers may get to gauge a candidate on the job rather than rely on a short interview, benefit from free labor in the short term, and potentially from the services of a skilled employee in the future.  What’s not to like?

Plenty, as it turns out.  An employer that does not pay wages does not pay payroll taxes, and Uncle Sam (as well as State Governments) takes a dim view of that.  This is not to say that unpaid internships are illegal.  Quite the contrary.  They remain popular for all those good reasons I just talked about.

But employers should be careful to extend only legitimate unpaid internships.  The IRS has a list of criteria to determine what makes an unpaid internship legitimate.  Because the list is long and subject to interpretation, tax appeals of an adverse IRS decision are not all that infrequent.

Let’s consider the state of the law today.  The crux of the matter is that the internship must  occur on the students receiving training for their own educational benefit.  In the Service’s own words, “the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience.”

But how to determine whether the experience is sufficiently academic or educational depends on half a dozen factors or more. One can easily see, when many factors intertwine, how two reasonable people might disagree in a number of circumstances.  And there, not to belabor the point, lays the seed of tax appeals.